Question

Here's the assignment: Please identify the depreciation methods best suited for: A company wishing to take the biggest expense during the asset's early years; A company wishing to expense an equal amount every year; A company wishing to expense a machine that does one function; A company wishing to expense extraction of natural resources. GIVE EXAMPLES!

Answer 1

* A company wishing to take the biggest expense during the asset's early years

Accelerated depreciation methods depreciate an asset more in the earlier years and less in the later years of the asset .The logic behind such method is that asset lost majority of their value in the first years of use.The asset will be more productive in the early year  than the comming years

eg :An asset with a five-year life would have a base of the sum-of-the-digits one through five, or 1+ 2 + 3 + 4 + 5 = 15. In the first depreciation year, 5/15 of the depreciable base will be depreciated. In the second year, only 4/15 of the depreciable base willbe depreciated. This continues until year five depreciates the remaining 1/15 of the base.

* A company wishing to expense an equal amount every year

The straight line method of depreciation is simple and widely used .This is a time based methods that allocates equal amount of depreciation to each time period .it is most appropriate when obsolescences is a primary cause of depreciation.it is also useful for asset that generate consistent revenues over their useful life

eg ; Mary buys a $2,000 machine  that won’t be useful after five years, and that its estimated salvage value is $500.

annual depreciation = ($2000 - $500) / 5 years

= $1,500 / 5 years

= $300

* A company wishing to expense a machine that does one function

The activity method depreciates an asset by the amount that it is used . An asets use can be measured by input units or output units .The activity method is suitable for equipment and vehicles but it is not useful fotr buildings because they depreciate due to time rather than its use .The activity method produces lower depreciation during lower production and more depreciation during higher use

eg Jhon purchases a new machine cost $ 220,000 for a project. Based on the vendor, this machine  expects to work for 5,000 hours. The scrap value is around $ 20,000.

In the first year of purchase, this machine has used for 1,500 hours.

Depreciation expense = [($220,000-$20,000)*1,500hours]/5,000hours

= $ 60,000 per year

* A company wishing to expense extraction of natural resources

Depletion is charged to expense the use of natural resources.Depletion is allocation of cost of natural resources to the period based on the rate of consumption of natural resource.

eg ;A mineral mining firm has purchased mineral rights for $10,000,000 and spent an additional $3,000,000 to develop the property. The firm expects to extract 500,000 tons of mineral. Based on this information, the depletion rate will be $13,000,000 divided by 500,000 tons, or $26per ton. In the most recent period, the company extracted 1,000 tons, for which the related depletion expense is $26,000.